How does anybody at Maiden can think this deal can work out profitably with a 36% cede

So in the end, after just over a decade, numerous controversies, and hundreds of millions of dollars of investors’ money lost, it ends as it always was going to for Maiden. Left holding the bag for AmTrust.

I have been arguing for a very long time it would end like this. The vehicle, in my view, was set up as essentially a regulatory and tax arbitrage to provide a cheap form of capital to AmTrust, and enabled some fun accounting games to boot.

But I have always thought it would inevitably become collateral damage. Against that, for a long time, investors have had two things to hang their hat on.

First, the broad nature of the quota share meant that Maiden’s and AmTrust fates were inextricably linked.

Second, the principal family members who founded both companies, were heavily invested in both vehicles and therefore had skin in the game.

However, with Maiden’s equity wiped to close to zero, and likely to get there soon if recent adverse development trends continue, the second of these conditions no longer held.

However generous you view of people’s good intentions are, it’s hard to argue that the family’s incentives are not heavily skewed towards maximizing the economics for AmTrust over Maiden.

With that as context, I was still astonished to see the terms of the re-negotiated quota share treaty between the two companies, which promptly eliminated the first of the conditions too.

On 3 January, the companies announced they were canceling large parts of the quota share.

I should say upfront there is at least part of this that is understandable. Maiden needed to reduce its AmTrust writings in order to become compliant with its regulatory capital requirements.

But there are two features of this deal that are simply….astonishing. Frankly that beggar belief.

The first is that Maiden appears to be paying a 5pt higher ceding commission, 36 percent instead of 31 percent, for a worse book of business. I should say that it is impossible to say it’s worse with certainty, but that’s my interpretation of what details we have. The transaction appears to have moved the lower loss ratio business to the “good bank” new quota share to make it more palatable to third party reinsurers, leaving Maiden with the rest.

It is beyond my comprehension how anybody at Maiden can think this deal will work out profitably with a 36 percent cede, and how it could possibly be thought a better outcome for Maiden’s capital providers than simple canceling the deal.

Second, there is the fact that this higher ceding commission appears to be applied retrospectively to the unearned premium that Maiden must return to AmTrust due to the cut-off nature of the cancelation.

I do not know how to describe this other than to call it a direct transfer of wealth from Maiden to AmTrust – something like $35mn.

Given Maiden’s precarious capital position, this is real money. I simply do not understand how any un-conflicted person at Maiden would agree to this retrospective change.

I think it is worth noting the firm’s former CEO and CFO both left last summer, leaving relatively inexperienced internal appointments in their place.

And let us not forget that the firm is still in litigation with its founding chief operating officer, who alleged he was fired for whistle blowing on self-dealing by Maiden’s founding shareholders, according to its most recent 10-Q.

This may not be the very final chapter in the Maiden saga. There’s certainly the possibility of a legal challenge from capital providers. And there may yet be an opportunity for an AmTrust style go-private deal involving buying back debt and preferreds at pennies on the dollar.

But for all intents and purposes, Maiden is now done. Cast off, having served its purpose as a cheap supplier of below-cost capital to its “sponsor co”.